Rainy Day Fund to be Drained?

All in the name of slightly lower income taxes. On the floor today in your Georgia Senate (which no less an authority than Kirby Smart called the better looking of the two chambers) there will be a vote on Senate Resolution 756. It is a Constitutional Amendment that would cap the state budget at $23.6 billion in 2018 and 2019 and $24.2 billion from 2020 onward. If the reserve account is at least 8% of the prior budget and revenues exceed the cap, the income tax would automatically be lowered 0.1%/year. Appropriations in excess of the cap would require a separate appropriations bill passed by a 3/5 vote, if the income tax isn’t otherwise offset.

I suppose if the Georgia legislature were a bunch of free-spending miscreants, this could help rein them in. But we have among the lowest budgets per capita in the country and our income tax rates are capped at a low rate. That last move caused us trouble with the people at Moody’s who set our bond rates. The ironic part about that is Moody’s determines how much the state has to pay when it borrows money, so lowering tax rates can actually cost the taxpayers more money. Counterintuitive, no?

This move also carries that threat. A decrease in the bond rating for the state would be costly and produce a drag on every project and multi-year initiative. So even if the conditions precedent never occur and there is never an offset (and you ignore the problems with the Rainy Day Fund), it may cost taxpayers money as soon as it’s passed.

A state income tax cut might seem enticing at first blush. But the state’s top two budget authorities raised concerns this month the move could risk Georgia’s ability to build savings for a rainy day and to protect its stellar credit rating. Still, twin pieces of legislation seem very much alive this Crossover Day. Senate Resolution 756 needs a floor vote to move over to the other chamber, while House Bill 238 needs to pass senate muster and get the final OK from representatives this session to send it to the governor’s desk.

The two combine to create just the sort of destabilizing threat flagged by the appropriations chairmen of both of Georgia’s legislative chambers during an appearance this month on Georgia Public Broadcasting’s “Lawmakers” program. State Sen. Jack Hill and Rep. Terry England both spoke in support of Georgia’s diverse revenue stream.
“Georgia has a pretty balanced approach to revenue through the income tax and through the sales tax as well,” Hill said.
Show host Bill Nigut asked England whether it is important this year for Georgia to increase its reserves, or so-called rainy day fund.

“Well, it has to be because as we went into the recession in [2008] and it worsened in [2009] and [2010] and [2011], we were sitting at about a billion and a half dollars in the rainy day fund at that point,” England said. “We just now are getting back to that number. Within a year and a half, two years, we basically had to spend that amount of money.”

As bad as the Great Recession was for Georgia, England said, things could have been much worse without the savings cushion the state had on hand when it hit.

“Had it not been for the rainy day fund, had it not been for some of the [federal] stimulus dollars, quite frankly Georgia would have suffered even worse than what we did,” England said. “And so I think … we need to be at the $2 billion plus, roughly. And when you look at $2 billion you’ve got to think about it in this way too. That’s about 10 percent, a little less than 10 percent of the state’s budget. So you’re just talking about operating state government, if there was a catastrophic event, for just a little over a month.”

Nigut suggested a common reason that comes up when someone says it’s time to slash the state income tax: Won’t it attract new businesses and jobs to the state?

“Well, that’s true and they, you know the theory they operate under, that we all operate under, is that economic growth can be enhanced by lower taxes,” Hill said. “I would only point out that we don’t seem to be having too much difficulty in attracting new industry in Georgia. The governor’s done a great job of promoting the state as a great place to do business.”

The two chairmen really know these issues. We should give careful consideration to what they have to say.